Saturday, September 06, 2008

McClatchy preparing to go private?

The McClatchy family appears to be getting ready to take its company private again.

The signal that something may be afoot is contained in a brief document filed at 5:01 p.m. yesterday at the Securities and Exchange Commission. The Friday night filing states chief executive Gary Pruitt resigned Wednesday as one of the four directors of the family trusts that collectively control 41% of MNI’s stock. Long-time company director Leroy Barnes, Jr., a retired utility executive, is replacing Gary.

Gary would have to step down as a trustee if the family were preparing to buy back the battered public shares of the company. That’s because a chief executive would not be viewed as properly representing the interests of all shareholders if he also sat on the board of a group of insiders trying to acquire full control the company for a fraction of what it was worth two years ago.

The SEC filing leaves open every possibility, saying the trusts may “from time to time, increase, reduce or dispose of their respective investments in the McClatchy Co., depending on general economic conditions, economic conditions in the markets in which the McClatchy Co. operates, the market price of the class A common stock, the availability of funds, borrowing costs, other opportunities available…and other considerations.”

(UPDATE 9.6.08: Although McClatchy officials did not respond to emails seeking comment on this post, the Sacramento Bee this evening published an article quoting a company officer as saying the changes at the trust are aimed at "improved governance" and not a "precursor to anything.")

McClatchy’s shares have been trading on the New York Stock Exchange since 1988 but the family has maintained ultimate control of the company through the super-voting Class B shares owned by the four trusts. The company was founded in 1857 during the California Gold Rush.

Although the environment for the newspaper industry is the worst in at least a dozen years, MNI’s stock has been pounded so low that a transaction to take the company private has become financially appealing, so long as you think newspapering is a good business to be in.

While MNI’s public shares were valued at $2.5 billion on the eve what proved to be the disastrous acquisition of Knight Ridder in 2006, its stock has fallen 88% since then to the point that it today is worth a comparatively meager $301.7 million. (MNI has written off three-quarters of the value of the KRI deal.)

This makes the outstanding shares of MNI so cheap that the family, Gary Pruitt himself or anyone else could buy it without putting much more debt on the company than it already is servicing. Depending on the price an acquirer actually paid, the company could come out slightly less leveraged after a going-private transaction than it is today. Here’s the math:

If an acquirer paid common shareholders a 20% premium over the current value of MNI’s shares, the company would have to add only $362 million to its $2.1 billion in debt to swing the deal. If the $59.4 million now spent on annual dividends for common shareholders were used to pay down the new debt, the company would emerge as a private entity owing 4.46 times its operating cash flow in the last 12 months vs. the 4.86x that it owes today. Lenders like the ratio of debt to cash flow to be as low as possible, so they would cheer the reduction.

A post published here in July identified MNI, Gannett (GCI), Lee Enterprises (LEE) and the New York Times Co. (NYT) as candidates for potential going-private transactions. The reason in each case was the deterioration of their respective share prices. Since then, the shares of LEE and NYT have gotten even cheaper. GCI is trading at roughly the same level today as it was then.

A public company taking itself private almost surely would face suits from shareholders angry about the monumental trading losses suffered in the last few years. Shareholders could argue that the companies were being sold too cheaply because management had been misfeasant – or worse.

But the ability to escape the pummeling of the public market – and focus wholeheartedly on rescuing their troubled businesses – are strong arguments for taking a newspaper private, so long as you believe there is a future in publishing.

Not all of the other publishing families would agree. Advance, Blethen, Copley, Cox and Landmark all have put various properties up for sale in one of the worst markets to unload a newspaper in modern history.

While a family bid to take McClatchy private is the most likely reason for Gary’s departure as a trustee, two alternate scenarios come to mind.

One is that Gary himself is leading a group of private-equity investors to buy the company on his own. If that were the case, however, he probably also would have stepped down as CEO, so as to pursue the transaction at arm’s length.

Another possibility is that the family members have become so concerned about the stewardship of the company that they may want Gary out of the room when they have a full and frank discussion about the future of the business, their commitment to it – and whether Gary is the guy to lead it in the future.

9 Comments:

I have no respect for Pruitt and the band of poltroons now leading my company. If the methodical dismantling of the news operations isn't enough, check out Howard Weaver's blog, which oscillates between two poles: faux visionary insight and deep geriatric peevishness.

One particular disappointment right now is that McClatchy refuses to let its newspapers try innovations on the local level. Try a strategy in Kansas City and another in Charlotte and another in Fort Worth -- make each paper a petri dish. But we are being collectively forced into serial amputations, hoping something will be left when the house ads return. In Raleigh, they all mocked Paxton for behaving that way when The N&O turned up the competitive heat on the Durham Herald-Sun. But under pressure, McClatchy leadership hasn't shown itself to be braver or more creative.

At least the McClatchy brass do good lip service, which is more than can be said for many of the pirates out there (You, Zell). After all, the official company history carries the by-the-day-more-risible title "Papers of Permanance."

I don't see how going private could hurt us worse than we are currently being hurt. If it gets us a little respite, they ought to do it. Our readers know the difference between good papers and bad papers. We shouldn't crap on them more than we have to.

My vote is that it only means Pruitt is about to walk the plank. As the leader who put together the disastrous purchase of KRI, I think Pruitt just lost confidence of his board of directors, and the resignations open the door to his quick exit. On another issue, you should have also put Scripps in the mix of family-controlled newspaper companies that could return to private hands. I always thought the rationale behind the recent split was to take the heritage newspaper core back into private hands. Time will tell if I am correct.

I'm not a lawyer, but would not any move by Gary Pruitt to buy MNI and take it private result in a lot of suits from disgruntled shareowners contending he drove the company into a situation from which he is now personally profiting. Just as one MNI stakeholder nursing vastly discounted stocks, I certainly would encourage legal action, either civil or criminal. I would also think a great legal case could me made that Pruitt has violated his fiduciary responsibilities managing trust funds while systematically overseeing corporate policies that drastically devalued a once great family-owned concern.

That accelerating death spiral graph you posted a few days ago explains more about what is happening at MNI than Pruitt's resignations. I think what happened to Pruitt is that years of bloated mismanagement came home to the board of directors when family members were told they were going to have to take a cut in their dividends, now an unreal 20 percent of MNI stock worth. Reducing the dividend to a more realistic 5 percent means a huge cut in the dividend checks for MNI family members, and I bet they didn't appreciate the suggestion that they lower their standards of living. But public or private doesn't really matter, because the third phase of the death spiral now is extracting its due, and management is now the target of layoffs and leaving. Mindless newspaper managers are going to have to accept their responsibility for these atrocious performance charts, and deep structural reforms are in the cards. The carnage to come in management ranks will make Sam Zell's TRB takeover look quaint. Clearing out the ossified deadwood will bring in a new generation of newspaper leaders less interested in the power perks and more determined to make this business work again.

I like the Titanic desk chairs reference. Because there were two options on that ship: rearrange the deck chairs to keep yourself busy intil the end or abandon ship. That pretty much describes the newspaper industry. The damage is too extensive. The ship is finished.

Here is a Wall Street Journal columnist who suggests what is in line for MNI is further dilution of the shareholders by floating new equity for the $2.1 billion in debt:http://online.wsj.com/article_email/SB122098269319815585-lMyQjAxMDI4MjAwOTkwODkyWj.htmlSomething about this doesn't sound right.

About Me

Alan D. Mutter is perhaps the only CEO in Silicon Valley who knows how to set type one letter at a time.
Mutter began his career as a newspaper columnist and editor at the Chicago Daily News and later rose to City Editor of the Chicago Sun-Times. In 1984, he became No. 2 editor of the San Francisco Chronicle.
He left the newspaper business in 1988 to join InterMedia Partners, a start-up that became one of the largest cable-TV companies in the U.S.
Mutter was the COO of InterMedia when he moved to Silicon Valley in 1996 to join the first of the three start-up companies he led as CEO.
The companies he headed were a pioneering Internet service provider and two enterprise-software companies.
Mutter now is a consultant specializing in corporate initiatives and new media ventures involving journalism and technology. He ordinarily does not write about clients or subjects that will affect their interests. In the rare event he does, this will be fully disclosed.
Mutter also is on the adjunct faculty of the Graduate School of Journalism at the University of California at Berkeley.